You would forgive UK firms for clambering over each other to escape from Dubai at the moment, yet Hopkins and WSP have vowed to keep their offices open. So do they know something other companies don’t?
Sometimes it’s hard to say goodbye. Hopkins Architects pledged to keep its Dubai office open last week, despite an increasingly nasty legal imbroglio with a major developer there, Dubai Properties. WSP, which made a loss of £2.4m on a turnover of £49m for its Middle East and North Africa business in 2009 and has minimal work in Dubai, is also retaining its office of more than 30 people in the emirate. In light of the rough time they are having, you can’t help wondering what is detaining them.
The decision to stay seems even stranger when you look at some of the ominous signs coming from the wider region. Qatar and Abu Dhabi, the two markets that were touted as the great hopes for UK firms after the Dubai crash, have been slowing down. The building industry in the Gulf Co-operation Council (GCC) region - comprising Saudi Arabia, Bahrain, Kuwait, Oman, Qatar and the UAE - shrunk by 2.2% during the final quarter of 2009. So are Hopkins and WSP doing the right thing, or is now the time to leave?
Reasons to leave …
Few would argue that Dubai holds any appeal as a construction market now. Building has written many times about the 400 stopped projects worth $300bn (£190bn) in the emirate but ratings agency Fitch warned earlier this month that Dubai’s construction market would remain under strain until 2011/12, with “a period of stagnant growth at best, and a double-dip contraction at worst”.
Fitch blamed this on the likelihood of increasing numbers of customers defaulting on payments, lack of liquidity for both customers and big investors, and oversupply.
Many UK firms accept they are not going to win any new work in Dubai but had hoped to use it as a base to pick up business in Qatar and Abu Dhabi. But even these markets – seemingly infallible because of their huge oil and gas reserves - have gone quiet. One UK consultant says: “Abu Dhabi has sort of shrivelled up, and Qatar has stopped as well. Everyone’s reconsidering projects, whether they have the money to fund them or not.”
As well as there being less work around, competition for it is hotting up. Neil Hamilton, director at Davis Langdon in Doha, says that in Qatar the firm is now bidding for work at prices about 50% lower than two years ago. “There are many new entrants in the market. We are now losing jobs to people who have only been here six months simply because if you are the lowest price you will get the order,” he says.
… and reasons to stick around
There are, however, some positive indicators. The IMF forecast in July that GCC states would record non-oil-related GDP growth of 4.3% this year and this will accelerate next year, with even the UAE predicted to grow 3% over the next four years. Accordingly, the volume of work waiting in the wings is more than healthy. A report published earlier this month by the Dubai Chamber of Commerce and Industry based on figures from regional government agencies said the GCC construction pipeline was worth $1.4 trillion.
Hamilton says: “Although the focus here now is more on finishing existing projects than starting new ones, the long-term prognosis is good. The countries of the Gulf need development and for that they need investment and expertise.”
As for the increased competition, Tom Smith, WSP’s head of international, is sanguine. “It’s a tough market, definitely more competitive than a year ago, but a lot of markets are tough at the moment. Qatar and Abu Dhabi still have huge potential - it’s a long game.”
There is also work happening right now. Qatar’s megaprojects, such as the £3.5bn Heart of Doha scheme, which is intended to regenerate the centre of the capital, are going ahead and the 1,000ha Education City has eight tenders out. Saudi Arabia is expected to award the tender for a terminal at Jeddah’s airport by the end of the year as part of a £20bn programme to upgrade airport facilities by 2020.
There are interesting opportunities in the less prominent Gulf states too. Kuwait recently announced a plan to invest $104b (£67bn) in social infrastructure, including housing, education and healthcare. Within the UAE, it is worth looking beyond Dubai and Abu Dhabi to the other five emirates. In Ras Al Khaimah, the emirate in the north-west tip of the UAE, the country’s biggest contractor Arabtec has just won a contract to build La Hoya Bay, a $800m luxury resort for Khoie Properties.
Even in Dubai there is some hope. The emirate’s Land Department recently announced the “Tayseer” scheme to guarantee loans for construction projects that pass strict criteria, including being 60% sold. So far 40 schemes have been approved. Chet Riley from Nomura says:
“This is a move towards breaking the fact the sector is being held hostage by banks.” Smith adds that Dubai will “come back eventually” due to its strategic importance as a regional hub for finance, trade, travel and schools.
If you’re convinced it’s worth sticking with the Gulf, a word of warning: more effort will be required to succeed. For one, clients want value added services - hence Davis Langdon is seeing a demand for the “one-stop shop” approach where it supplies due diligence and loan monitoring alongside QSing, sustainability and FM advice. Hamilton says: “The long-term future volume of work is there but you will have to be good and you’ll have to chase it. Before, you could just turn up in the Middle East and the work would flow in but now it’s like the rest of the world.”
The Nakheel problem
Nakheel, one of the emirate’s biggest developers and most notorious non-payers, has begun to pay its debts to UK firms; all have received the first $500,000 of what they are owed. This is not quite as encouraging as it might sound, however. This is because the deal being offered takes the form of 40% in cash and 60% in the form of an Islamic bond, called a “sukuk”.
Chet Riley, an analyst at Nomura, says the sukuk is a problem. “Although it matures in five years, most creditors would want to sell it immediately to get the cash, but I think they’d be likely to get 50 cents in the dollar for it.”
Neither does the paying of Nakheel’s debt end liquidity issues. Riley says: “This will free up some liquidity in the system but Nakheel has yet to make payments to its creditors and, until this happens, the construction sector will be in a stalemate.”